(Releads, adds fund manager, CEO on Phoenix)
By Mark Thompson and Jan Schwartz
FRANKFURT/HANOVER, March 30 (Reuters) - Continental AG unsettled investors on Tuesday by warning it may face charges for restructuring its loss-making U.S. tyre unit after meeting expectations with a 23 percent rise in 2003 core profits.
Shares in Continental , the world's fourth largest tyre maker, led decliners on a weaker blue-chip DAX index , trading 1.8 percent lower at 31 euros by 1038 GMT.
Dealers and fund managers said the U.S. remarks came as a surprise, prompting investors to take profits racked up during a 33 percent rally since the stock entered the German benchmark index last September. It has doubled in value in 12 months.
"This is something Conti didn't suffer from in the past and we are seeing the share price react to that," said Trudbert Merkel, fund manager at Deka in Frankfurt.
Continental Chief Executive Manfred Wennemer said the group would struggle to increase profits this year if it has to take a charge for restructuring at its U.S. passenger and light truck tyre operations, which have been suffering from price pressure.
He said a decision had not yet been taken on restructuring but that if it were necessary, he expected the costs would come in below $200 million.
Continental said in a statement 2003 earnings before interest, tax and amortisation (EBITA) totalled 855.2 million euros ($1.04 billion), while sales came in at 11.5 billion, against 11.4 billion in 2002.
Nineteen analysts polled by Reuters had on average forecast EBITA of 854 million euros for the year, up from 694 million in 2002, and sales of 11.477 billion.
"Despite the difficult situation of the automotive and automotive supplier industry, we managed not only to increase our sales but also to once again top the previous record earnings of 2002, surpassing them by far," Wennemer said.
U.S. PRICE PRESSURE
He said price pressure was expected to intensify, particularly in the United States due to aggressive rebates offered by automakers.
"This is one more reason why we are analysing major restructuring measures that may be required in our passenger tyre business in North America," he said.
The group said it expected sales and operating profit before restructuring costs to rise this year and proposed a dividend of 0.52 euro, up from 0.45 in 2002. Its North American business is only expected to break even in the fourth quarter of 2005.
The stock was also weighed down by uncertainty over the value of Continental's planned 227 million euro takeover of rubber and plastics parts maker Phoenix .
Continental said on Monday it would bid 15 euros per share for Phoenix to bolster its profitable ContiTech unit, a deal which should yield annual savings of 30 million euros and which already has the support of Phoenix's two main shareholders.
"The added value of the Phoenix acquisition is unclear at this stage and investors need more explanation from the company about the long-term goals and value creation with these plans," said Deka's Merkel.
Wennemer said he expected integration costs of 15 million euros. The group's gearing ratio, which fell to 58.9 percent at the end of 2003 from 110 percent a year earlier, would not rise above 70 percent as a result of the acquisition, he said.
Continental shares have outperformed the blue-chip DAX index and Dow Jones Stoxx European autos index so far this year with a gain of some five percent.
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(Additional reporting by Marius Bosch)